There are many good reasons to keep your long-term savings in a Roth IRA. But if you’re not sure if this is the right account for you, ask yourself these two questions to find out.
1. Do I expect my pension to increase in retirement?
When you invest money in a Roth IRA, you effectively lock your tax rate on your contributions because you pay the current tax rate on them, and then in retirement you withdraw that money tax-free. As such, a Roth IRA makes a lot of sense if you think you will have a higher tax rate as you get older than you do now.
Now you might be thinking, “How the hell are my retirement taxes going to be higher if I’m not working?”
But who’s to say you won’t work? Many older people actually keep their jobs, and if you earn a decent amount, that money, plus withdrawals from your retirement plan and Social Security benefits, could actually run you into a higher tax bracket than you are today.
Furthermore, although we know what tax rates look like at the moment, we do not know if they will increase in the future. Therefore, if you think you could end up with a higher tax rate as a combination of personal income sources and changes in tax policy, then a Roth IRA could be a good bet.
2. Do I want the opportunity to leave money to my heirs?
The money you invest in a pension tax account like the IRA or 401 (k) can’t just sit there forever. When you turn 72, you will have to start taking it required minimum distributions, or RMDs, from your account, the amount of which depends on your balance and life expectancy at that time.